More to come from the RBA

It was a surprise for some, but it really should not have been. The RBA lowered the cash rate by a further 25bp at its meeting overnight to 4.25%, after a similar reduction last month. There looks to be plenty of scope for further easing over the first half of next year. As noted in the RBA statement accompanying the announcement, global growth has slowed markedly and there is the potential for further downside over coming months. In addition, growth in consumer prices is roughly in the middle of the target range, wages growth is moderate, financial conditions have tightened considerably and the terms of trade is declining. Also, house prices are definitely under downward pressure, against the backdrop of persistent private sector deleveraging. By mid next year the cash rate should be down to at least 3.5%.

For the Aussie, an aggressive rate-cutting schedule is already priced-in. As a result, the response to last night’s rate cut was relatively muted – it fell to almost 1.0150 but has since steadied and is now above 1.02. That said it has started to look rather wobbly again over recent trading sessions. In the near-term, a re-test of parity would not be a surprise.